The Bitcoin universe: Scammers, criminals and the feds

For enthusiasts and the merely interested, Bitcoin has made for a remarkable story. There have been shadowy activist groups, clampdowns by governments, mail-order drug dealers and run of the mill scams at every turn.

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For enthusiasts and the merely interested, Bitcoin has made for a remarkable story. There have been shadowy activist groups, clampdowns by governments, mail-order drug dealers and run of the mill scams at every turn.

If you are an investor or a Bitcoin business, though, maybe it’s not been so fun. This is an economy that is trying to mature, after all.

This begs the question: Are stability and maturity attainable? Will an unregulated marketplace with a peer to peer digital currency cannibalize itself first?

Two things: First, there is a demand, and there is a need for such a currency. Second, the fact that Bitcoin’s value continues to climb has to prove the model to some extent.

It’s just that Bitcoin’s activities thus far have left a lot shaken up in its wake.

First came the currency’s crash back in the spring. That event left a lot of naysayers feeling pretty smug. The bubble had burst, they said. Hindsight has since proven that wrong.

Next came Bitfloor’s abrupt closing after its US bank accounts were closed. The banks clearly did not want to take on the risks associated with Bitcoin then.

The US government’s stance does not necessarily bolster banks’ confidence, either. On the one hand, Bitcoins could lead a trail back to cyber criminals and digital money launderers, which aids enforcement efforts. On the other hand, the US government has no real jurisdiction, and any regulations have been and will continue to be clumsy.

Bitfloor taught the next generation of Bitcoin businesses was that compliance will be key going forward. At the end of October, supposedly Hong Kong-based GBL, a Bitcoin trading platform, closed up shop without warning, and $4.1 million disappeared.

Red flags surrounded GBL’s activities, and a Bitcoin Talk forum moderator had warned users that GBL was probably a scam. Nevertheless, the service was holding more than $4 million in user deposits when it went offline.

GBL’s demise came on the heels of a hack into the inputs.io Bitcoin wallet, resulting in the loss of $1.2 million worth of Bitcoins.

At the moment, investors or have been scammed or swindled have little legal recourse — there’s not much the FBI or some other national agency can do.

Perhaps this is the nature of things in a frontier economy. The strongest companies will survive and would thus be poised to thrive at a later stage of Bitcoin’s development.

Until then, investors would be wise to perform due diligence before jumping into any investments. It’s just like Las Vegas here: You should not put up anything you cannot afford to lose.